Specialty Retailers Defying Sector Gravity (ROST, DKS)

Specialty retailers have held market share better than big-box stores or mall anchors in recent years, insulated from the mass exodus out of brick-and-mortar operations into e commerce sales through a narrow focus on goods and services less easily found online or at competing retailers. As a result, many specialty plays have recently hit new highs while the broad sector struggles through a persistent downtrend.

Finding these stocks is as easy as sorting a list of sector components by price’s relative positioning above or below the 200-day EMA and seeing what floats to the top. Specialty leaders have to stay strong to outperform their peers, causing their stock prices to gain ground more quickly than underlying averages. In this case, the scan has output a diverse group of storefronts that include pawn shops and sporting goods stores, in addition to more traditional apparel operations.

Dick’s Sporting Goods Inc. (DKS) gained a completive advantage in recent weeks, winning inventory and storefront rights to the now defunct Sports Authority. It continues to benefit from sub-sector consolidation, as evidenced by an 80% rally that’s now reached resistance going back to 2014. In fact, it faces little competition with other publically traded companies, except in specific Cabella’s (CAB) product lines.

The stock rallied above the 2007 high at $34.80 in 2011 and entered an uptrend that stalled in the lower $50s in the middle of 2012. It posted nominal new highs into the 2014 peak at $58.87 and sold off to the low $40s. A bounce into 2015 got sold at resistance, triggering a decline that ended at a four-year low in January 2016. The current advance into resistance shows solid volume support, with on-balance volume (OBV) hitting an all-time high, predicting that price will soon follow in a major breakout.

Ross Stores Inc. (ROST) emerged as a sector leader in the last decade and has retained that title throughout this bull market cycle. Rally momentum eased in March 2015 after the stock pushed above $50, giving way to volatile price action that carved the outline of a megaphone pattern (red lines). It found support in the lower $40s in November and bounced to pattern resistance in March, with that level holding firm ahead of a higher low in June.

The stock returned to megaphone resistance this month and broke out, posting an all-time high at $66.28 after reporting strong earnings, and is now pulling back to test new support between $62 and $63. OBV has tracked positive price action, raising odds that support will hold and complete confirmation of a bullish trend advance that could reach the mid-$70s.

EZcorp Inc. (EZPW) operates more than 800 pawn shop and consumer loan outlets in the U.S., Mexico and Canada. The stock topped out in the upper $30s in 2011 and entered a steep downtrend that coincided with a new batch of industry regulations, finally coming to rest at an 11-year low in February 2016. It’s gained considerable ground since that time, rising fourfold above $10.

The rally reached major resistance at the broken bear market low in July, giving way to a sideways pattern, ahead of this week’s rally to a 17-month high. However, the uptick still hasn’t cleared 2009 resistance so caution is advised until the stock prints a wide range buying spike above that level, signaling a breakout. Short sellers should also wish to follow short-term price action because a reversal could gather steam, dropping price into the unfilled July gap between $7.70 and $8.50.

The Bottom Line

The retail sector has been mired in a bear market for the last year but a basket of specialty retailers have swum against the downward tide, posting strong returns in line with unique competitive advantages.